Temporary Rate Buydown vs. Permanent Rate Buydown: What's the Difference?
Paying money upfront to lower a mortgage payment sounds like a single idea, but it actually splits into two very different tools depending on whether the reduction is meant to last.
The short answer
A temporary rate buydown lowers the effective interest rate, and therefore the payment, for a limited early period of the loan — often the first year or two — after which the rate returns to the loan’s original note rate for the remainder of the term. A permanent buydown, more commonly known as paying mortgage points, reduces the actual note rate for the entire life of the loan in exchange for an upfront fee. Both cost money upfront; they differ in how long the benefit lasts and who typically funds it.
How a temporary buydown works
With a temporary buydown, funds are placed into an account at closing and used to subsidize the difference between the reduced early-period rate and the loan’s actual note rate. A common structure reduces the rate by a set amount in the first year, a smaller amount in the second year, and then steps up to the full note rate from the third year onward, though the exact structure varies by program. The buyer’s underlying note rate — the one used for qualifying purposes in many cases — doesn’t actually change; what changes is the payment amount during the subsidized period.
- Funded upfront. A lump sum is deposited to cover the reduced payments during the buydown period.
- Temporary effect. The rate reduction expires on a set schedule, often over one to three years.
- Often seller- or builder-funded. In many transactions, this cost is covered by someone other than the buyer.
How a permanent buydown works
Paying points works differently. Each point typically costs a percentage of the loan amount and permanently reduces the note rate for as long as the loan exists, unless it’s refinanced or paid off early. Because the reduction lasts the life of the loan, the upfront cost is generally weighed against a break-even point — the amount of time it takes for the monthly savings to exceed what was paid upfront. If a loan is held well past that break-even point, permanently reduced payments continue for the remaining term.
Which buyers each approach tends to suit
A temporary buydown tends to appeal to a buyer who expects income to rise, plans to refinance once rates change, or simply wants breathing room during the first year or two in a new home, since the deeper discount is front-loaded exactly when moving costs and closing costs tend to pile up. A permanent buydown tends to suit a buyer planning to stay in the home and hold the loan for many years, since the fixed cost needs time to pay for itself through the ongoing lower rate. Someone unsure how long they’ll keep the loan may find the temporary structure less risky, since there’s no long-term rate commitment being purchased.
How funding sources tend to differ
Temporary buydowns are frequently funded by a seller or builder as a purchase incentive, particularly in a market where sellers are motivated to close a deal, though a buyer can fund one directly as well. Permanent buydown points are more commonly paid by the buyer directly, since the ongoing benefit accrues entirely to whoever holds the loan.
What to weigh
The core question is time horizon: how long the buyer expects to hold the loan without refinancing, and whether a lower payment matters more in the near term or over the entire life of the mortgage. Because rates, program structures, and typical costs shift over time, running the actual numbers for a specific loan offer is more useful than relying on general assumptions about which option saves more.